A new watchdog report finds that the FBI and the Pentagon are quietly investigating whether military contractor Kuwait and Gulf Link Transport Co. has illegal ties to Iran, despite assurances from the Defense Department that there is no indication the company's business dealings ever violated U.S. law.

The report by the Project on Government Oversight finds that the contractor, known as KGL, continues to hold $1 billion worth of contracts with the U.S. military as the FBI and the Pentagon's Defense Criminal Investigative Service probe allegations that it deals with Iranian shipping interests, ports, and front companies despite sanctions meant to derail Tehran's nuclear ambitions. "No contractor to the U.S. military has ever been debarred for doing business with Iran, so KGL could emerge as a test case," POGO's Adam Zagorin writes.

The investigation is at least a year old, according to documents and interviews, and appears to remain active. POGO writes that federal agents at Dulles airport pulled aside a senior KGL executive trying to enter the country and questioned him for hours about the firm's ties to Iran.

Ashton Carter, currently the Pentagon's No. 2 official, wrote a letter to Sen. Mark Kirk, R-Ill., on July 15 saying that the U.S. found "no indication" KGL ever "violated U.S. law." Kirk had provided internal company documents to the Pentagon that apparently indicated KGL had illegal ties to Iran and asked for an explanation. Sens. Claire McCaskill, D-Miss., Robert Menendez, D-N.J., Marco Rubio, R-Fla., and Tom Coburn, R-Okla. -- as well as Rep. Brad Sherman, D-Calif., and former Rep. Ron Klein, D-Fla. -- have all asked "pointed" questions and received similar assurances from Carter, according to POGO.

KGL continues to deny the allegations it is engaged in business activity with Iranian entities subject to U.S. sanctions.

"In light of the apparent probe (unmentioned in any of Carter's letters to lawmakers), his assurances that everything is fine appear, at the least, incomplete and possibly misleading," Zagorin writes. "According to documents and interviews, the FBI, the Defense Criminal Investigative Service, and other U.S. agencies have been actively examining links between Iran and KGL -- a process that apparently began well before Carter sent many of his reassuring letters and that seems to be continuing."